Wednesday, January 28, 2009

I'm out of town at a work-related conference, and will have limited time to post. Just want to pass along a couple of thoughts here today.

1) This stimulus plan is starting to look like a disaster. I can't imagine a worse time to add wasteful spending. We're being sold on a bill that will stimulate job growth in 2009. Just read some commentary on this bill. I don't need to say anything more. Here's a good starting point:

2) The format of the blog has shuffled a bit in the past few weeks. I'm trying a few different things. Some based from ideas, and others based on the market. Previously I did more individual stock analysis and commentary, as opposed to news stories and links etc, which I've been doing lately. This is mostly due to the lack of investment ideas I'm finding. The best thing going right now is short term trading, and that really isn't what this blog is about. As I find more compelling stocks and sectors, those types of posts will increase again. I'm always open to comments and criticism about content and/or style of the blog.

3) I did update some links on the site. Specifically, I included links to some of my other writing elsewhere online. Some of it is writing from here re-posted with separate comments, and some of it is original content to that site, so its worth taking a look at if you're interested.

4) Personal Dividends is a new online magazine that I'm writing for. They cover topics integral to living a fulfilling and enriching personal life. Important issues covered range from Money and Wealth Management, Lifestyle Issues, Culture and Arts and Self Improvement. So go on over and take a look. www.personaldividends.com.

Tuesday, January 27, 2009

Geithner Forces Citi to Cancel Jet Order. A follow up from yesterday's reading. Normally, I don't like to government telling corporations what to do, but when we are supplying them capital to stay alive, this is one time to make an exception.

According to Congressional Budget Office estimates, a mere $26 billion of the House stimulus bill's $355 billion in new spending would actually be spent in the current fiscal year, and just $110 billion would be spent by the end of 2010. This is highly embarrassing given that Congress's justification for passing this bill so urgently is to help the economy right now, if not sooner.

I keep hearing how important it is to get this passes quickly. But if these numbers are even remotely accurate, how can it do anything? It surely won't do anything quickly, which people are expecting. Maybe this is the reason they keep saying "its going to get worse before it gets better." But if we're going to wait a couple of years, there's a decent chance the economy will improve on its own by then, or at least to a more "normal state."

Again, if its going to take that long, why do we need this bill anyway? Its just going to add to a long list of unpaid obligations that are stacking up quickly.

I've taken a pretty hard look the past week at the Pfizer-Wyeth deal, partially because its the only thing representing normal market action (anything to take a break from bailouts and poor earnings reports). Anyways, I came across a very interesting take on the deal. Basically, Pfizer is cutting its dividend and acquiring financing to pull this deal off. Pfizer is also going to be laying off thousands of workers in the type of jobs that Obama is looking to add right now as a part of this merger. Where are they getting the money for the deal? Yep, you guessed it. Bank of America, Citigroup, Goldman Sachs, JP Morgan. And who is providing capital to keep these guys afloat? Yes, the American taxpayer.

The market reaction to the actual Pfizer-Wyeth deal isn't as pleasant as last week's rumor of the deal. The deal would value Wyeth shares at just over $50 per share, through a combination of cash and Pfizer stock. The problem here is the market environment. The deal isn't expected to close until late Q3 or early Q4. That is an eternity in this market, where there is a ton of uncertainty.

There is the rumor that Pfizer's rating could now be cut. It seems Wyeth investors are a little worried about waiting that long, and worrying about Pfizer's stock. That is partially why the deal got a good premium considering the market climate.

But deals this big take some time, no question. A lot can happen between now and then. It appears that for this morning at least, Wyeth shareholders would rather not wait it out.

Sunday, January 25, 2009

President Obama has been quickly getting to work promoting issues he's planned for quite some time. He's promised accountability in Washington, and to me, that's one of the most important issues to tackle. But I'm worried that one person can't change what's taken decades to develop.

President Barack Obama's ban on earmarks in the $825 billion economic stimulus bill doesn't mean interest groups, lobbyists and lawmakers won't be able to funnel money to pet projects. They're just working around it — and perhaps inadvertently making the process more secretive. The projects run the gamut: a Metrolink station that needs building in Placentia, Calif.; a stretch of beach in Sandy Hook, N.J., that could really use some more sand; a water park in Miami. There are thousands of projects like those that once would have been gotten money upfront but now are left to scramble for dollars at the back end of the process as "ready to go" jobs eligible for the stimulus plan.

And here it is...

The result, as The Associated Press learned in interviews with more than a dozen lawmakers, lobbyists and state and local officials, is a shadowy lobbying effort that may make it difficult to discern how hundreds of billions in federal money will be parceled out. "No earmarks' isn't a game-ender," said Peter Buffa, former mayor of Costa Mesa, Calif. "It just means there's a different way of going about making sure the funding is there."

It's a problem that isn't party specific. It's a culture. Washington has it's rules and if you try to deviate from those rules, you're out quick. If you play by the rules they create, you can become a career politician. Career politician. I don't think that there is a worse phrase.

The game in Washington works well because the majority of taxpayers don't seem to know or care, so it gets worse. But in this time of massive bailouts to failing corporations and fraud at every level, you'd think people would look harder at whats going on in our nation's capital. We're now being sold on an economic stimulus package that is "so important" and "must be passed immediately" to stave off more economic calamity. But then how do congresspeople have time to get earmarks and wasteful spending into the deal?

I like Obama as a leader. I think he truly wants to improve our country. But he not only has more challenges than many other presidents have had to deal with, but he has to deal with a group of politicians that need to change too. But they don't seem ready to.

Saturday, January 24, 2009

A deal now appears imminent, and the price has risen like I had hoped. Here are some of the details:

Pfizer is lumbering closer to a takeover of Wyeth and may fork over $65 billion to $70 billion to get a deal done, the WSJ reports, citing people familiar with the matter.

The purchase price is expected to be about $50 a share, nearly 30% higher than Wyeth’s stock price right before the Journal disclosed news of the talks. An agreement could be reached next week, though timing isn’t entirely clear. And the deal could always fall apart. If a merger is eventually consummated, look for Pfizer’s Jeff Kindler to stay on as CEO at the larger Pfizer, the WSJ reports.

How would Pfizer pay for the prize? About two-thirds would be cash and one-third Pfizer stock. Even in these tough times, Pfizer has lined up about $25 billion in financing from banks. The drugmaker would draw on its reserves for the rest of the cash portion.

If this ends up being the case, I'd probably sell before the deal goes through. I'm not a fan of mega mergers. There has been a lot of talk about what consolidation might mean for the industry. You'd have less competition, which typically leads to higher prices. But, there could be plenty of synergies in combining the two companies, which would make for some better products produced for less.

A lot of people will probably lose their jobs, as cuts are inevitable in a merger of this size.

The merger would probably come out to a net gain for both companies, and the market is responding as such, with shares of both companies rising on Friday. For me personally, I've looked at some of the mega-mergers in the past and the results are questionable. I've always been a bigger fan of increasing sales through organic growth and smaller acquisitions of up-and-coming companies or companies that satisfy a niche. Combining two mature companies seems to be a deal just for the sake of doing a deal.

The rumors are back that Pfizer is negotiating to buy Wyeth, which would create a huge pharmaceutical company.

Pfizer, based in New York, has been negotiating with Madison, New Jersey-based Wyeth for months, one person said. A combination would create a drugmaker with annual sales of more than $70 billion, and best-selling medicines that include Pfizer’s cholesterol pill Lipitor, the world’s top-selling medicine with $12.7 billion in 2007 sales, and Wyeth’s Prevnar vaccine against pneumonia.

Based on similar deals, the figures thrown around would put this deal around $60 billion. It is still speculation, and a few factors could push it higher. There are a few ways to look at this. To begin, I'm a Wyeth shareholder so I already am a believer in the quality of Wyeth. I think for Wyeth, a deal at $60 billion would be a little light. Its not a deal they need to do. They have a nice cash position and a good lineup of products. Pfizer needs this deal a lot more. They have Lipitor expiring and haven't been able to create new earnings outside of acquisitions. It seems their management may be feeling the pressure to do some kind of a deal:

Kindler has been under pressure from investors and analysts to make a major acquisition as Lipitor sales fade in advance of the patent expiration. Kindler’s efforts to reorganize the company by firing more than 15,000 employees, including top management, hasn’t been enough, Samuel Isaly, managing partner at Orbimed Advisors Llc, said in an interview.

“Pfizer is desperate in my opinion -- or should be desperate,” Isaly said. "Jeff Kindler will be terminated if he doesn’t do something soon, so he has really got to move it and we wouldn’t be surprised to see a major move.”

During this period where credit is hard to come by, you might think it would be difficult to finance a deal this big. But if there are any companies that can pull it off right now, it is pharmaceutical companies. They have the most stable earnings and balance sheets right now.

“There are very few companies in the world that are going to get money in this environment, but these companies are going to get it,” Ryan said in a Jan. 20 telephone interview. “When we have conversations in private with these CFOs, I am being told they have access to money.”

Pfizer may have to cut its dividend to finance the acquisition, said Leerink Swann analyst Seamus Fernandez in a note to clients today. The benefit to the share price from the deal would still be worth it for investors, he said.

So we'll see where this goes. The deal could go higher, or the deal could fall apart. If I were Wyeth, I wouldn't rush into anything. They don't need this deal and it should be a little sweeter for shareholders, in my opinion.

Thursday, January 22, 2009

Obama Inauguration Sets Record for Private Jets. "Of course, flying private to a celebration of a populist, pro-environment President is a bit like the Detroit execs jetting to Washington for bailout money. How do you call for social responsibility after touching down in a $40 million, gas-guzzling Gulfstream?"

A lot of debate has been raised about China's economy. For the past couple of years it was a picture of robust growth. That growth has clearly slowed, due to a number of factors. The question now is what does the future look like for them? Popular economist Nouriel Roubini is negative on China:

“China is in a recession regardless of what the highly massaged official numbers claim,” Roubini, a professor at NYU’s Stern School of Business and the chairman of consulting firm Roubini Global Economics, wrote in a note today on his Web site. “When growth is slowing down sharply the Chinese way to measure GDP is highly misleading.”

Jim Rogers is bullish on China:

Investors should buy China’s agriculture, water treatment, power generation and infrastructure stocks because the companies won’t be hurt by the nation’s slowing economy, investor Jim Rogers said in an interview today.

“There is a lot happening in China and there will be those that will hold up well,” said Rogers, who correctly predicted the start of the commodities rally in 1999 and wrote books on investing including “A Bull in China: Investing Profitably in the World’s Greatest Market.”

Like many investors, I've been intrigued by China's growth and increased level of influence. In fact their situation is almost reverse that of the US. They are privatizing companies, while we are nationalizing them. I came across an excellent piece about China vs. the US written by Tim Swanson. I highly recommend reading it.

Wednesday, January 21, 2009

What was one of the most successful and heralded investments of the past decade is now turning into a paper loss. Amazing.

Saudi Prince Alwaleed bin Talal, who made his investment reputation by putting money into Citicorp 18 years ago, once had a $10.7 billion paper profit on the stake he bought. Now it’s all gone.

Citigroup Inc., the company formed when Travelers Group Inc. took over Citicorp a decade ago, closed at a lower price yesterday that Alwaleed effectively paid for his $590 million investment in 1991.

The CHART OF THE DAY shows how Citigroup’s share price and market value have plunged since the end of 2006, when the stock peaked at a record $57. Before the descent, the prince had an 18- fold gain on his holding.

Alwaleed received preferred stock in Citicorp that was convertible at $16 a share. After adjusting for the Travelers deal, a subsequent spinoff of Travelers’ property and casualty insurance business and two stock splits, the price amounted to $2.98 for each Citigroup share.

Citigroup dropped below that threshold yesterday for the first time since its formation. The stock’s 20 percent decline, to $2.80, left the prince with a $35 million loss on the initial stake, excluding dividends.

This shows just how much Wall Street has changed. I've view Citigroup as a symbol of the buildup and success (and excess) of Wall Street over the past decade, and its subsequent fall is fitting.

I've always found prince Alwaleed to be quite interesting. His biography is worth reading if you have the time. I did a book review of it awhile back, if you're interested.

One of my major themes for 2009 is the consumer trading down to more inexpensive goods and services out of necessity. One industry where this is most clear is the mobile phone industry. A phone itself is pretty much mandatory spending now, but the type of phone is purely discretionary. I continue to think Nokia will benefit most from this, as they are the worldwide leader in phone sales. They also have the most sales in cheaper phones. A lot of talk is about smart phones, and Apple and RIMM are doing well here, but those sales are slowing too.

The mobile-phone market is moving away from mid-tier handsets as the global economic slump prompts some consumers to trade down to cheaper devices and operators feed demand for high-end phones by promoting them with subsidies.

The global handset industry is forecast to shrink for the first time in eight years, with Citigroup Inc. analysts predicting a 13 percent plunge as consumers are more hesitant to replace their phones. Espoo, Finland-based Nokia cut its industry outlook twice in less than a month in the fourth quarter and said in December the market will slide 5 percent or more this year.

“This year will reshape the industry quite a bit,” said Mikko Ervasti, an analyst at Evli Bank in Helsinki.

The polarization of the market may squeeze those in the middle. Sony Ericsson Mobile Communications Ltd., Motorola Inc. and LG Electronics Inc. have struggled to come up with hit phones or stumbled in their attempts to widen their product offerings.

Nokia, which ships 15 units per second, may boost its global market share to more than 40 percent in 2009, said Geoff Blaber, an analyst at CCS Insight in London. Nokia’s third-quarter market share was 38 percent, more than its next three rivals combined.

“In this economic environment, we expect some, not all, consumers to trade down to less expensive devices,” Nokia Chief Executive Office Olli-Pekka Kallasvuo said on a call last month. “We are best positioned to take this tradedown opportunity.”

Nokia also has an advantage in its network of suppliers and distribution. Nokia was ranked first globally in sourcing, logistics and distribution last year, ahead of companies like Procter & Gamble Co. and Toyota Motor Corp., according to ARM Research. Nokia's size allows it to demand lower prices for the 120 billion parts it buys from suppliers.

“Nokia is set to be a winner on a relative basis, but they will be hurt too,” said Martti Larjo an analyst at Nordea Equity Research in Helsinki. “Apple and RIM will also be winners in relative terms as the smartphone market will still continue to grow, albeit at a lower pace.”

So although these companies may report sales declines during this environment, they are gaining in the long run. I like Nokia, Apple, and RIMM, and I'd buy any of these stocks on further market or earnings-related weakness.

Tuesday, January 20, 2009

There's not much to say about the big news event today that has not already been said. But as a rule the stock market doesn't like change. Today is no different, and actually more so. This new regime will have the chance to make some major policy changes as they have strong control of Washington, and a mandate from the American people. The problem for the market is this leaves a lot of question marks for corporations. Things are very uncertain right now, and the last thing they want to worry about is additional regulatory pressures.

Most of the commentary I'm hearing is that Obama's stimulus plan isn't big enough, or something to that effect. I believe our country needs some re-investment back into system, but like many, I'm hesitant about giving the government a blank check for spending. I hope there is little waste in this bill as there are too many things that need attention.

No matter what your political beliefs are, today is a day to be optimistic. We're on a new path and need to be re-energized. Hopefully today is that start.

Friday, January 16, 2009

One of Barack Obama's main campaign promises is that he wouldn't raise taxes for 95% of Americans, or basically the middle class. The problem though, isn't income taxes. States across the country are facing budget shortfalls, and the easiest ways to make up the difference is through tax increases. Even worse, states will raise consumer taxes, which raise equally no matter who you are, or how much you make. Gas taxes, liquor taxes, and other sales taxes are being proposed across the country. These taxes will end up affected lower incomes the most, as they have the least amount of discreationary income but still need basic goods which will be seeing tax increases. Thus, no one will be able to escape these taxes.

The bottom line here is that even though income taxes might not be raised, the governemnt is going to get extra revenue any way it can.

When faced with a budget shortfall, instead of raising taxes, the government could, get this...CUT SPENDING! But we're going to spend our way out of this recession. Rather than encourage fiscal responsibility amongst state governments, we're going to offer a "use it or lose it" spending stimulus to the states, and my guess is they'll use it.

The government said earlier today it will invest $20 billion in Bank of America and guarantee $118 billion of assets to help the company absorb Merrill and prevent the financial crisis from deepening.

The agreement is part of a commitment to “support financial-market stability,” the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said in a joint statement shortly after midnight in Washington.

About three-quarters of the federal aid is intended to cushion Merrill’s losses, with the rest for Bank of America, Chief Financial Officer Joe Price told investors during today’s conference call.

This is not a surprise. If we remember that crazy weekend when Lehman went under, and all the investment banks were on the verge of following, we'll know why this is happening. The government was under the gun, and they really didn't want to lose another bank. So Bank of America stepped up and agreed to buy Merrill. I can guarantee it was one of those deals where the government basically said, "if you do this deal, we'll do whatever is necessary to help you make it work." So, now that they need help, its no surprise they are getting it. Just like when no one could figure out why Warren Buffett got great terms on his deal with Goldman Sachs. Same deal. They guaranteed that they wouldn't let Goldman fail. Bottom line here is that when capital is very scarce, if you've got it, you can get terms which protect against failure.

We're continuing the pattern of privatizing gains, and socializing losses. Its horrible for taxpayers, but once we've committed to this path, its hard to get off it. I anticiapate more of this happening in the future.

Thursday, January 15, 2009

Here's some interesting news on a stock I was high on for a long time, Noble Drilling Corp. (NE). They are an offshore oil driller with a great competitive advantage in terms of leases, locations, and how the company is structured. The problem is its be massacred with the price of oil. I owned it for quite awhile in 2008, but currently have no position.

Friedman Billings Ramsey Managing Director Robert MacKenzie estimates that Noble's liquidation value is $24 a share. (In valuing Noble's fleet, MacKenzie estimates what these rigs would be sold for in the open market after depreciation. To be conservative, he takes 30% off last fall's peak prices for rigs.)

Noble's shares closed at $21.04 on Wednesday.

"Noble is trading below the worst-case intrinsic value" of its fleet of rigs, says MacKenzie. "That doesn't mean that it's not going to trade down in the near term, but anytime you can get an investment-grade company at less than what it seems to be fundamentally worth, it's a good investment over a prolonged period."

It helps that Noble has "by far the strongest balance sheet" among its peers with debt to capitalization of 7%, adds MacKenzie. Carrying a universally Stable rating by credit agencies, its long-term debt is rated Baa1 by Moody's and A-minus by both Standard & Poor's and Fitch.

Now, the stock price isn't going to resume higher unless a few key things happen, and the most important one would be crude oil heading higher. The key reasons why its business model flourished over the past year are in question. With demand soft, there is no need for oil companies to pay big money for offshore oil leases. Noble is okay for the near term, as they have leases locked in (usually about a year out) with high dayrates, but the market trades on anticipation of future events.

Saying the stock is trading below breakup value is great from a value standpoint, but it doesn't mean you're going to make money by buying the stock. The company likely won't breakup and sell off its assets, and those breakup values could prove to be grossly inflated if the recession lasts for a long time, or if we see a major shift from crude oil to alternative energies (this will happen, but it will take some time).

Bottom line, if you're looking to buy an oil stock, its a good buy. They are positioned well and ready for a major bounce if oil prices come back. A lot of the downside risk has been taken out of the stock, and if you're willing to be patient, this could be a nice buy.

With the much anticipated stimulus plan coming soon, we got a look at the details today. It's a pretty broad based bill, with quite a bit of money allocated to tax cuts and social programs.

I was pleased to see $32 billion to build a smart electricity grid. There are also tax credits and incentives to promote research with will be important.

I don't think this will change much for investors, as there isn't a lot of detail on private sector items. A lot will depend on states and local municipalities and what projects they put forward. It has the feel of a "use it or lose it" plan for the states, and I'm sure they'll use it. But it doesn't necessarily mean stock XYZ will benefit.

I think the market as a whole will benefit in the short term. Next week we'll probably see some better results with spirits up due to the inauguration.

Wednesday, January 14, 2009

Citigroup, who is becoming a symbol of the Wall Street buildup of the past 20 years, is now fittingly breaking apart. The joint venture of their brokerage unit Smith Barney with Morgan Stanley will create the largest firm of financial advisers. But is this "super-brokerage" really what consumers want right now? While the strength of conglomerates has often been praised for their synergies and the amount of services they can provide, the model hasn't been that successful. This joint venture probably isn't being done for the sake of creating a big brokerage, but necessity. Citigroup needs capital, and they are looking to re-shuffle the organization.

The venture, which New York-based Morgan Stanley will control with a 51 percent stake, would employ 20,390 brokers in more than 1,000 branches. The new entity would surpass the 16,000-strong “thundering herd” of brokers at Merrill Lynch & Co., which was acquired by Bank of America Corp. on Jan. 2.

“Brokerage is such a personal, intimate business that it’s defied by the ‘thundering herd’ concept,” said Arthur Levitt, a senior adviser to the Carlyle Group and former chairman of the U.S. Securities and Exchange Commission who serves on the board of Bloomberg LP. “What we’re going to see in the brokerage business is breakaways from these managed institutions and the beginnings once more of boutique brokerage firms.”

But in a time when people are not happy with their portfolio performance, this might be an opportunity for people to leave their current broker.

Morgan Stanley Chief Executive Officer John Mack may face hurdles in retaining brokers and their clients after the worst financial crisis since the Great Depression undermined faith in the biggest brokerages. A poll of millionaires in November by Spectrem Group found that more of them had a negative opinion of banks and brokers than of independent financial planners.

Spectrem Group, a Chicago-based consultant and research company for financial companies, conducted focus groups of people worth more than $1 million and did an online poll of more than 750 millionaires in November. The research found that the millionaires had lost 30 percent to 40 percent of their net worth since September and that they had lost faith in their advisers, especially those at bigger firms.

“Full-service brokerage firms were the firms whose investors were the most angry and had the lowest performance levels, they were the most likely to say they’re unhappy with their adviser,” said Catherine McBreen, a managing director at Spectrem. “They feel that the full-service brokerage firms, as opposed to the independent financial planning firms, are more in it for the commissions, for the stock selection, for pushing product.”

I've felt for some time that this trend will continue. I think companies like Charles Schwab are going to gain immensely during this trend. They are a company with a great range of products, and much lower fees than their full-service counterparts. Schwab's stock typically carries a premium, but I'd look to pick up some shares if they dip a bit lower.

There's a nice piece in the New York Times today about the Middle East and their desire to diversify into the world's clean energy leader. Some highlights from that article:

So even as President-elect Barack Obama talks about promoting green jobs as America’s route out of recession, gulf states, including the emirates, Qatar and Saudi Arabia, are making a concerted push to become the Silicon Valley of alternative energy.

They are aggressively pouring billions of dollars made in the oil fields into new green technologies. They are establishing billion-dollar clean-technology investment funds. And they are putting millions of dollars behind research projects at universities from California to Boston to London, and setting up green research parks at home.

“Abu Dhabi is an oil-exporting country, and we want to become an energy-exporting country, and to do that we need to excel at the newer forms of energy,” said Khaled Awad, a director of Masdar, a futuristic zero-carbon city and a research park that has an affiliation with the Massachusetts Institute of Technology, that is rising from the desert on the outskirts of Abu Dhabi.

“The leadership in these breakthrough technologies is a title the U.S. can lose easily,” said Peter Barker-Homek, chief executive of Taqa, Abu Dhabi’s national energy company. “Here we have low taxes, a young population, accessibility to the world, abundant natural resources and willingness to invest in the seed capital.”

This is intriguing to me. I've been interested in investment opportunities in "frontier markets" such as the Middle East. Although these markets have basically been an oil trade in the past, its good to see that they are using their massive wealth to diversify into alternative energy. I'm not positive that they will take the lead, but competition in this space, or any space for that matter, will lead to cheaper prices, which is a positive. High cost has been one of the biggest detractors from the clean energy movement.

The Gulf States do have some advantages. They have a lot of cash from oil operations. They are centrally located to provide products and services to both Europe and Asia. Plus, areas like Dubai have been growing into major business centers, so the transition should be natural. Solar power seems like the obvious choice to start, but I'm sure they will look into many others as well.

There is no real way to invest in this trend yet. There are some funds that track this region (GAF, GULF, TRAMX), but are mostly tied to banks and construction companies, and actually trade based on oil prices. These are long term investments, but overall, this is a region gaining in wealth and influence, and seeing diversification amongst their economy is a positive.

Keeping up with the "nowhere to hide in this market theme", lets take a look at target date funds. These are funds that adjust their weightings into various asset classes based on the your retirement date. For example, someone not retiring for 30 years would have a higher percentage of stocks vs bonds, and so on. To me, they are gaining in popularity due to a couple of main reasons:

The baby boom generation is approaching retirement, thus more people than ever getting serious about IRA's and other retirement accounts

People don't want to do their homework on how to invest retirement money

More people have become disillusioned with investment managers, and want to do their own investing without doing much research

With 2008 wrapped up, we can see how all of these investments have done. And as it turns out, many of these funds were hit pretty hard, which is expected in a tough year. But the "conservative" funds, or those of people retiring in the next few years were hit pretty hard as well, and that is eye opening.

Among funds targeting retirement in 2010, a few posted declines of 10% or less, but many inflicted losses far exceeding 20%, according to data from investment researcher Morningstar. For investors on the verge of retiring, big losses can have an even bigger impact on how long their money will last.

While one year is a short time frame for measuring funds that may be held for decades, there's a clear lesson: Even for an investment sold as a no-brainer, it's crucial to look under the hood.

A case in point is the OppenheimerFunds target-date funds, where the LifeCycle Transition 2010 Fund lost 41.3% in 2008.

Oppenheimer's offerings use the firm's Core Bond fund as the primary bond holding. That fund lost about 35% last year, thanks to aggressive bets on credit derivatives that backfired. "We're very disappointed," says Oppenheimer's Keith Tucker.

This is surprising. Why is a 2010 retirement fund making agressive bets on credit derivatives? These fund managers are obviously performance chasing in funds that should be worried about preserving capital with some small, steady income.

I did some research of my own into the T Rowe Price funds. I do think they are one of the best fund managers out there, and they are doing pretty well with target funds too. But their 2010 fund lost 26.71% in 2008, which is still quite a bit for a conservative fund. Looking at the fund composition, they are sitting in 45% Domestic Stocks, 37% Domestic Bonds, 11% Foreign Stocks, and roughly each 2.5% in Cash and Foreign Bonds. Doesn't 56% stocks seem a little high for someone entering retirement? Its not outrageous, but a little aggressive, especially in this market. I could be overlooking some re-balancing in these funds though. I don't have their historical compositions, and they could be putting some more money to work in stocks due to cheaper stocks. But I'm still a little concerned about it. Here's the info on their 2010 fund.

The bottom line here is you still have to know what you're buying. There will always be fads in the investment world as long as people are willing to buy what they're selling. I do think these funds make sense, but if they aren't living up to their purpose, what's the use? Index funds are cheaper. I've always been a fan of low cost index funds as your core holdings, especially if you don't want to spend much time with your investments. After that, I like to own a couple of stocks or funds with smaller stakes, and take advantage of time and compound interest.

Sunday, January 11, 2009

As we undertake a major change in philosophy in Washington, its important to think about what we'd truly like to accomplish. The economy sits at a critical precipice, and the decisions made during the next year could impact the next decade. If you haven't read Atlas Shrugged, its worth your time. Its a very long book, but it will probably change the way you think. As many classics do, it seems to find a way to be relevant no matter what point in history you look at. There's a new opinion piece in the Wall Street Journal about Atlas, and its worth taking a look at. This paragraph sums up the book nicely:

Ultimately, "Atlas Shrugged" is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand's political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear -- leaving everyone the poorer.

Friday, January 9, 2009

In any downturn, cash is always harder to come by. In this environment, capital is especially hard to get. We've all heard the phrase "cash is king", and its usually true. But in this environment, it really is true. Companies with extra cash are better positioned to create a better competitive advantage over their competitors. This can be for a couple of reasons:

-Many companies need access to capital to finance expansions, or at a minimum daily operations. Companies with extra cash have no worries about getting credit downgrades or accessing capital if they need it.

-Cash rich companies can use the downturn to acquire smaller companies, or even competitors. When the market overshoots to the downside with market valuations, its a great time for companies with lots of cash to scoop up deals.

-Companies with lots of cash will always be attractive to investors, especially during the typical "flight to quality" that happens during market panics. Investments in these companies usually hold up better than their counterparts as investors get defensive.

In a recent interview, Cisco CEO John Chambers said "companies with cash are king, queen and the royal family." Cisco has close to $27 billion in cash and short-term investments, and the total continues to climb. hambers says Cisco is always aggressive in making acquisitions during downturns. He says the best time to make acquisitions is in downturns.

In another example, take a look at this quote from Nokia CEO Olli-Pekka Kallasuvo,

“When times are tougher, people who have stronger positions fare relatively better than the competition . . . So, overall, I believe many of our competitors will have limitations here in terms of their ability to do things.” Nokia has $4 billion net cash.

Nokia’s goal of increasing its market share in 2009 may also be assisted by the trend of consumers “trading down” to cheaper mobiles.

This is exactly what I've been talking about. Apple to PC, Blackberry to Nokia, Macy's to Wal-Mart... Not by choice, but necessity.

Some other companies with a lot of cash: Google, Microsoft, T Rowe Price, and Humana.

Wednesday, January 7, 2009

We've seen the headlines declaring the 2009 deficit to exceed $1 trillion, and with the massive economic stimulus bill coming, we appear ready to add to it. Although Obama claims the bill will have no pork attached to it, but I'm a little skeptical. They will need to come up with new ways to increase government revenue, and here's one possible one:

With fuel prices low due to a economic slowdown and demand destruction, those is Washington might seize the opportunity to raise the federal gas tax...

A government commission has called for a 50 percent increase in gasoline and diesel fuel taxes, which could mean an extra 10 cents per gallon for drivers.

Congresswoman Corrine Brown told Channel 4 the government needs a comprehensive plan to solve the problem -- a plan that could include vehicle registration fees or toll roads and other local taxing options.

Brown said it's a combination that has worked overseas.

"There is no quick fix, but we don't have to reinvent the wheel, we can look at Europe, and it works, and we need to figure out how to do that here," Brown said.

Ah yes, the European model. It makes sense in theory to raise gas taxes so people only buy fuel who absolutely need it, and the rest can rely on public transportation. But it just doesn't work for a major part of America geographically.

If the tax increase went directly to alternative fuel research and production, it might be feasible, but it most likely to go "other areas."

Now is the time to sell this, and they know it. Oil is a resource with dwindling supply, and as soon as the major world economies stabilize, gas prices are going to rise. And selling an increase on the gas tax won't fly with $4/gallon gas. Remember this summer when there were calls for a federal gas tax holiday? What a difference six months makes.

Throughout this consumer-led recession, we've seen the trading-down from specialty goods and name brands to generic goods and discount items, not out of choice, but necessity. Wal-Mart (WMT) has seen strong sales, and that trend should continue. But I'd take it a step further and take look at dollar stores. Family Dollar (FDO) posted strong results and raised their profit outlook. There aren't many companies doing that right now.

"The company expects full-year sales to rise 4 percent to 6 percent, up from a prior outlook of 3 percent to 5 percent. On a same-store basis, it forecast a sales gain of 2 percent to 4 percent; it previously called for a rise of 1 percent to 3 percent."

Dollar Tree (DLTR) would be another similar company. These companies appear to be some of the strongest beneficiaries of a significant recession.

I've taken a look at some other possibilities such as pawn shops and payday loan companies. These companies are performing well also as consumers are strapped for cash. Trader Mark did a nice profile on this thesis. However, the payday loan companies could come under some regulatory pressure under Obama/Biden. They've discussed lowering interest rates and tightening standards for these lenders in their economic policy:

"Obama and Biden will extend a 36 percent interest cap to all Americans. They will require lenders to provide clear and simplified information about loan fees, payments and penalties, which is why they'll require lenders to provide this information during the application process."

Not that its a bad thing, but it could question the strength of these companies as strong investments during the next year or two.

I'd stick to the discount retailers for now. Many of their stocks have been bid up a bit, but should continue to see strong performance in a difficult environment.

Tuesday, January 6, 2009

Here's the quote of the day, via an article by Frank Shostak on Mises.org.

"If it were possible to lift real economic growth by means of money pumping, world poverty would have been eradicated a long time ago. Real economic growth requires real savings to fund various activities that support and promote it. (Remember that money is just a medium of exchange and cannot grow anything. Money is employed to exchange goods of one wealth generator for the goods of another wealth generator.)"

When we think about that literally, it makes many of these questions we've been asking pretty clear. Can the government spend its way out of this recession? Can wealth be created by artificial inflated values? Is the cure for too much cheap money more cheap money? Should we trust those who oversaw this problem to orchestrate the so-called "recovery package"?

U.S. mutual funds suffered in the greatest stock decline since 1937. The economic recession drove down shares of every industry from energy producers and automakers to technology companies and banks.

Heebner’s fund gained 80 percent in 2007 to beat all peers, largely by buying energy stocks. He was hurt in 2008 after oil prices fell almost three-fourths from a record in July. Known for his rapid movements in and out of stocks, Heebner reversed course in the third quarter by selling energy shares and snapping up bank stocks such as Citigroup Inc. and Bank of America Corp.

“Heebner’s strategy has always been prone to big performance swings,” Morningstar’s Tan said. “This fund has a better chance of making up for lost ground than others.”

Even though Heebner has been piling into banks, it doesn't necessarily mean we all should. These stocks will see a ton of speculation and false moves in the next year. He has the experience of being able to move quickly in and out of shares, and he needs the quick moves off the bottom to help his performance. I wouldn't be suprised if he moves out of many of these bank stocks if we see a sharp rally in 2009.

The market is following the pattern I expected, and I think this will continue. We're going to see a lot of trade-able rallies, and many of these will be related to the economic stimulus package. The "experts" are coming out in full force saying "the bottom is in" "time to buy stocks" etc. I think the general public will be pretty hesitant to listen to them this time. Read more about this in my 2008 RECAP/2009 OUTLOOK.

Like I said, the best buys are short-term trades, because there are too many uncertainties. Earnings is one of the big ones. We're going to get a little clearer picture in the next couple of weeks. We know the results will be mostly weak, but the outlooks are much more important than the numbers right now. We're obviously going to get a lot of spin that says the numbers, although bad, were better than expected and its time to buy. I'd urge caution when listening to that talk.

Although the financial crisis was started by the banks, this is going to be a consumer-led recession. Employment numbers are weakening, and until the job market and real estate markets show some stability, consumers will be hesitant to buy.

A big part of the economic stimulus will be creating jobs, and many supposed "green jobs." That all sounds great, but we've talked about the potential stalling of alternative energies. Energy prices are low, capital is hard to come by, and businesses and individuals don't have the extra money to change to these expensive alternatives. Sustainability is one of the big buzz words within this movement, but I'd be more worried about he sustainability of these "green jobs."

About My Blog

Welcome to "In the Know." Here I discuss trends in the market, and how I think investors can profit from them. I'll discuss specific stocks, sectors, and economic/political trends.

I'm a student of the markets and am constantly looking for new ways to gain an edge, but for the most part, I'm a value guy. I think you have to be flexible to be a successful investor, but discipline is by far the most important factor.

Disclaimer: The views expressed on this site are purely opinions of the author and should not be taken as investment advice. The author is not a registered financial advisor, and provides only his own commentary. The author disclaims all liability in any investment purchases made based on information gathered at this site, or through any link provided by this site. Readers should be aware that investments are subject to loss in value, and the author recommends consulting an investment professional before taking any action.